Silver mining began about 5,000 years ago in Anatolia (modern day Turkey). The metal quickly became the impetus for exploration and the discovery of new worlds as it was a sought-after measurement of wealth, and valued as money, jewelry and for decorative objects. Eventually, the industrial age began to put silver to new uses due to its two important characteristics: of all the known elements – from hydrogen (H; atomic number 1) to Ununoctium (Uuo; atomic number 118), silver is the best electrical conductor and the most reflective. Because of its unique characteristics, silver now has numerous applications in art, industry, science, technology and investments [for more silver news and analysis subscribe to our free newsletter].
During the last two centuries, technological advancements such as steam-assisted drilling and mine dewatering improved silver production. Over the course of the 19th century, annual production quadrupled to a total of nearly 120 million troy ounces. Today, with mines in Australia, Mexico, Russia, Peru, Turkey, the United States and many other countries, the average yearly global mine production is about 671 million troy ounces.
Price Drivers
The price of silver is largely driven by industrial demand. In 2011, for example, the worldwide demand for silver was 1,040.6 million ounces. Of this, nearly half – 486.5 million ounces – was for industrial applications. Other demand (in millions of ounces) included jewelry (159.8), coins and medals (118.2), photography (66.1; this number has dropped significantly in the last decade due to advances in digital photography) and silverware (46.0). Of course, when production levels are high and there is more supply than demand, the price of silver can correspondingly drop.
Another driver is gold. Silver has a tendency to follow the price of gold in terms of direction; when gold rises, silver is likely to as well. The price of gold is driven by monetary policy, the value of the US dollar, worldwide jewelry and industrial demand, and wealth protection. During periods of economic uncertainty, many investors flock to gold because of its enduring value, viewing it as a safe haven for their money. Compared to gold, however, silver has lower market liquidity and, as such, tends to be far more volatile. Because the price of silver often follows gold, many investors analyze the gold-silver ratio which represents the number of silver ounces it takes to purchase one ounce of gold. The higher the ratio, the less expensive silver is compared to gold, and vice versa [see also Three Reasons Why Gold Is Overvalued].
Investment demand through vehicles such as silver bullion bars and coins, silver mining stocks, silver futures and options contracts, and silver exchange-traded funds is another driver of silver prices. In 2002, for example, the demand for coins and medals was 31.6 million ounces compared with 118.2 million ounces during 2011. Due to concerns about inflation and overall economic uncertainty, silver reached an all-time high of $49.79 per ounce in late April of 2011. During 2011, physical silver bar investment grew by 67 percent to 95.7 million ounces, and global coins and medals fabrication increased to an all-time high of 118.2 million ounces.
Silver ETFs
Silver ETFs (exchange-traded funds) provide investors with silver exposure without the need to hold the physical metal or pay direct insurance, assay, and storage costs. Trading like equities on an exchange, the funds themselves may hold physical silver or invest in derivatives that track silver prices. Today’s investors have a variety of silver ETFs from which to choose [see also Which Silver ETF Is Right For You? SLV vs. SIVR vs. DBS].
Some silver exchange-traded funds are not standard ETFs and may not be an investment company registered under the Investment Company Act of 1940 or a commodity pool for the purposes of the Commodity Exchange Act. As such, certain silver ETFs are not subject to the same regulatory requirements as mutual funds.
Under US tax law, owners of Silver ETFs may be treated as if they own a corresponding share of the Trust assets, and tax treatment is consistent with owning a collectible instead of a financial security. As a collectible, short-term gains are taxed as ordinary income and long-term gains are taxed at either of two capital gains rates (depending on the investor’s tax bracket). It is important to consult with a qualified tax specialist and investment advisor prior to making any investment decisions.
iShares Silver Trust ETF (SLV)
Launched on April 21, 2006, the iShares Silver Trust ETF is intended to provide investors with a cost-effective means of exposure to the price of silver. It is the most actively traded silver ETF with an average daily volume of more than 8 million shares. This liquidity provides an advantage over owning physical silver.
This ETF, which currently has a sponsor’s fee of 0.50 percent, holds silver bullion, and the fund is designed to reflect the price of silver owned by the Trust, less the Trust’s expenses and liabilities. Traded on NYSE Arca, the Trust holds only silver and is not actively managed [see also Were Gold and Silver Manipulated Alongside LIBOR?].
ETFS Physical Silver Shares (SIVR)
Issued by ETF Securities USA LLC, this ETF is designed to track the spot price of silver bullion, providing investors with a cost-effective way to access the silver market. Launched on July 24, 2009, the ETF holds physical allocated silver bullion held in vaults by a Custodian. It currently has a gross expense ratio of 0.30 percent.
ProShares Ultra Silver ETF (AGQ)
Issued by ProShares, this ETF seeks daily investment results (before fees and expenses) that correspond to two times (200%) the daily performance of silver bullion, as measured by the US Dollar fixing price for delivery in London. Launched on December 1, 2008, this ETF has a current expense ratio of 0.95 percent.
ProShares Ultra Silver ETF does not invest directly in commodities; instead, it invests in financial instruments that are linked to the performance of silver such as swap agreements, forward contracts, and futures and options contracts [see also Why Jim Rogers Thinks Gold Will Drop 20%].
ProShares Ultra Short Silver (ZSL)
Launched by ProShares on December 1, 2008, ProShares UltraShort Silver ETF seeks daily investment results (before fees and expenses) the equal twice (200%) the opposite of the daily performance of silver bullion, as measured by the US Dollar fixing price for delivery in London. This ETF has a current expense ratio of 0.95 percent.
This ETF does not invest directly in commodities; instead, it invests in financial instruments that are linked to the performance of silver such as swap agreements, forward contracts, and futures and options contracts.
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Disclosure: No positions at time of writing.
